Conversion of Fleets to Natural Gas Could Generate More than Just Good Feelings

Spend Matters welcomes a guest post from Jim Pfeiffer, a Senior Director with Alvarez & Marsal Business Consulting. Jim specializes in operational performance improvement and supply chain management.

Regardless of perceptions about "green" initiatives, there may be a different "green" to be had...the kind that generates financial returns. The collapse in natural gas prices coupled with rising petroleum prices have given rise to an opportunity for fleet owners to benefit from converting to clean-burning natural gas.

There are two clearly divergent vectors in play in the world of energy today. Prices of crude-oil-derived products like gasoline, diesel, and jet fuel are elevated and rising globally while domestic natural gas prices have collapsed due to the boom in gas production from the so-called "shale gas" plays. This has created an unprecedented disconnect in the relative value of natural gas vs. petroleum fuels on an energy-equivalent basis. While the natural gas story is a pleasant surprise for commodity purchasers, the situation in petroleum is far darker.

There are those who will claim that the world is at or near "Peak Oil," or the point where conventional oil production has reached a maximum level and from where it will go into terminal decline regardless of drilling activity. Although this is a controversial idea, it is generally accepted that the "easy-to-find" oil has been found and the world is transitioning into an era of harder to find, more expensive oil. The most obvious evidence of this is the rate of capital expenditures relative to the increase in oil output over time.

This idea has perhaps been best illustrated by Steven Kopits, Managing Director from Energy industry research firm Douglas-Westwood in his February 2011 report to the US House of Representatives Energy Subcommittee, "Oil the Economy and Policy."

Source: Douglas-Westwood

In this report, Mr. Kopits observed that oil supply stopped responding to increases in price around 2004 yet capital spending by oil companies continued to rise with increases in price. Most telling is the observation that from 1995-2004, the $2.4 trillion in CAPEX spending coincided with 12.3 million barrels per day increased crude oil production. Contrast that to the following six years, from 2005-2010, when another $2.4 trillion in CAPEX spending saw crude production falling by 0.2 million barrels per day.

These wildly divergent energy trends have created a potentially lucrative opportunity for fleet owners. According to the US Department of Energy (DOE) Alternative Fuel Price Report, there is an increasing spread between the at-the-pump prices for diesel fuel compared to compressed natural gas. As of the January 2012 report, the spread between CNG and diesel is $1.48/gallon.

Further, this spread can be locked in by hedging the spread between natural gas and heating oil (a natural proxy for diesel fuel) via the futures markets, eliminating much of the commodity price risk associated with natural gas conversion investments.

The two primary forms of natural gas that can be used to power vehicles are compressed natural gas (CNG) and liquefied natural gas (LNG). CNG is stored in a tube-shaped tank attached to the vehicle. LNG requires more energy to cool and compress into its liquid form but has much higher energy density and is thus more suited to longer range applications.

The fuel price savings of CNG relative to petroleum can be significant for a highly utilized vehicle or fleet. For example, a single medium duty truck that travels 50,000 miles per year and delivers average fuel economy of 8.1 miles per gallon will save more than $9,000 per year at today's spread of $1.48 per diesel equivalent gallon.

The City of Chesapeake, Virginia recently announced that it is planning to convert its fleet of Class 8 solid waste collection trucks from diesel fuel to CNG. According to George Hrichak, Chesapeake's Fleet Manager, the incremental cost for a new Class 8 CNG-equipped truck is $20,000 to $30,000. Chesapeake plans to transition to CNG over time following its normal 6-year replacement schedule. Given the potential for fuel savings, the primary question becomes access to CNG refueling stations. According to the DOE Alternative Fuels and Advanced Vehicles Data Center, there were fewer than 1,000 CNG fueling locations across the United States in 2011.

If retail CNG is not readily available, fleet owners may consider investing in CNG fueling infrastructure. CNG refueling is generally characterized into two types: "time-fill" and "fast-fill." Time-fill fueling generally entails having the trucked fueled overnight as gas is compressed and stored in the on-board vehicle tanks.

The City of Chesapeake plans to build a CNG refueling station for use by the solid waste fleet and the public. They project the cost to build out a refueling capability to be between $750,000 and $1 million and will include slow-fill (i.e. overnight) capability for 53 refuse trucks and some fast-fill capability for the public. The "time-fill" portion of the infrastructure needed to supply their internal fleet would cost about $500,000.

Conditions are favorable for conversion to CNG to reduce cost, to reduce greenhouse gas emissions, and to take advantage of domestically produced energy. Fleet managers considering making the switch should consider the investment and return, vehicle maintenance implications, and, potentially, tax or other incentives.

If you are interested in learning more, a good place to start would be to read "Business Case for Compressed Natural Gas in Municipal Fleets," a report published in June 2010 by the DOE's National Renewable Energy Laboratory.

- Jim Pfeiffer, Senior Director with Alvarez & Marsal Business Consulting

Voices (2)

  1. facilities maintenance software:

    Thank you for sharing this post and shining a light on what
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  2. Emily:

    Great article! Anytime someone makes the connection between going green and saving money, it’s an article worth reading.

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